Can you deduct car insurance on your taxes?
Car insurance rates are tax-deductible when the insured vehicle is used for business purposes. If you are self-employed, you can write off car insurance as a business expense by deducting a percentage of your insurance bill based on the business use of your car.
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UPDATED: Apr 13, 2022
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- Business owners, including sole proprietors, can write off business-related auto expenses, including car insurance
- Only a few types of employees are allowed to deduct work-related expenses, but they do not have to itemize deductions to do so
- It is important to keep detailed records to be able to write off car insurance as a business expense
Paying income taxes and car insurance premiums can add up over time. Most people would like to save money wherever they can, so a common question is: “Is car insurance tax-deductible?”
A tax deduction is an expense that you subtract from your reported income, lowering your tax liability. As a result, you get a larger refund or owe less in taxes that year. The IRS has specific rules and processes for counting deductions and calculating tax liability.
Car insurance is only tax-deductible for business activities. If you’re eligible to deduct your auto insurance cost, you must keep detailed records and report your deduction on your tax form, whether you’re a business owner or an employee.
Our helpful guide explains the situations when car insurance is tax deductible, how to deduct your insurance premiums, and how to calculate what percentage of your premium qualifies.
When Car Insurance Premiums Are Tax-Deductible
Auto insurance is tax-deductible when business owners and certain employees use their vehicles for business purposes. Suppose you’re a business owner who uses a car only for business. In that case, you can deduct the actual cost of your insurance rates, fuel, maintenance, and other vehicle-related expenses, or you can choose a per-mile rate, which the IRS calls “standard mileage.”
If you are an employee, you can deduct some of your personal vehicle expenses if you are an Armed
Forces reservist, qualified performing artist, fee-basis state or local government official, or employee with impairment-related work expenses. Although you are never allowed to deduct the cost of commuting to and from your regular place of business, you can write off what you spend on qualified work-related expenses as long as your employer does not already reimburse you. If you do not meet the employee category requirement, check with your employer to see if they will reimburse you at a companywide per-mile rate.
As a sole proprietor, the place to account for your actual expenses or standard mileage deduction is on Schedule C, Profit or Loss From Business. If you’re a qualified employee claiming either deduction, you report it on Form 2106, Employee Business Expense. Neither sole proprietors nor qualified employees have to itemize deductions on their tax returns to claim these write-offs.
If Your Car Is for Personal and Business Use
If you’re a sole proprietor, you can deduct car insurance on your taxes even if you only use your vehicle for business use some of the time. You can use the actual expenses or standard mileage calculation based on the percentage of driving you do for business purposes.
For example, if you drive eight hours every day and six of those are for a grocery delivery company, 75% of your driving is business-related, and 25% is personal. If you consistently do 75% of your driving for business, you can write off 75% of your insurance rates.
If you decide to go with the standard mileage deduction, remember that it changes yearly. The IRS publishes standard mileage rates for every tax year, so be sure to calculate your deduction based on the correct year’s rates.
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Write Off Your Car Insurance Deductible
If your vehicle is damaged or destroyed, you may also be able to write off your insurance deductible and the replacement or repair cost above and beyond what your insurance company pays out. However, unless the vehicle is used only for business purposes, it will most likely count as a personal loss, which you cannot deduct unless it’s part of a federally mandated disaster, such as a hurricane or wildfire.
Keep Detailed Records for Your Tax Filing
Even though you can claim car insurance on your taxes without breaking the law, be sure you’ve kept good records so you can write off car insurance as a business expense. If you get audited, you’ll have to show how you got the numbers you reported on your tax form.
You also need to review your records when deciding whether to itemize or take the standard deduction. If you’re a qualified employee, you don’t need to itemize all your deductions to file Form 2106. When you’re deciding between actual expenses or standard mileage, though, it pays to calculate both and choose the one that benefits you more.
Consult a tax professional if you need help figuring out what counts as a write-off and how to calculate your deductions. As you move from personal to self-employed taxes, things get complicated quickly. Although you may be able to manage on your own, there’s no shame in asking for help when you need it. A qualified tax professional can also help you keep up with ever-changing tax laws and back you up if you ever get audited.
Remember: Your Car Insurance May Be Tax-Deductible
If your state requires you to carry expensive insurance, for example, as a ride-share driver, you don’t want to miss out on writing off that expense. Even if you’re allowed to use your personal insurance as a business owner, it’s still a significant expense every year, and it would be a shame to skip the deduction.
To keep your insurance costs as low as possible, always keep car safety in mind and try to qualify for an accident-free discount. You could also ask your insurance agent to review your policy in case you are eligible for any other discounts.